Use the Customer Lifetime Value Calculator to determine what you can expect to generate in revenue from each customer over the course of their relationship.
Customer Lifetime Value Calculator
To calculate the customer lifetime value for a retail business, you can follow a straightforward two-step process. This calculation involves identifying the total revenue a customer is expected to generate over their relationship with the business, and then subtracting the costs associated with acquiring and serving that customer.
Here’s how it’s done:
- Determine the Average Order Value (AOV):
- Calculate the average revenue per customer order.
- This is the total revenue divided by the total number of orders.
- Calculate the Average Purchase Frequency Rate (AFR):
- Determine the average number of purchases a customer makes per year.
- This is the total number of orders divided by the number of unique customers.
- Estimate the Average Customer Lifespan:
- Determine the average duration of the customer relationship, in years or months.
- This can be calculated by analyzing historical customer data.
- Use the formula:
- CLV = Average Order Value (AOV) x Average Purchase Frequency Rate (AFR) x Average Customer Lifespan
For example, if the retailer has:
- Average Order Value (AOV) of $50
- Average Purchase Frequency Rate (AFR) of 4 orders per year
- Average Customer Lifespan of 3 years
Then the CLV would be calculated as:
CLV = $50 x 4 x 3 = $600 per customer
This means the retailer can expect to generate $600 in revenue from each customer over their average 3-year lifespan with the business.
What is customer lifetime value (CLV)?
CLV is a metric representing the total net profit a business can expect from a customer over the entire relationship duration. It considers factors like average order value, purchase frequency, and customer lifespan.
Why is CLV important for retailers?
CLV helps retailers understand the long-term value of their customer relationships, which is crucial for making informed decisions about customer acquisition, retention, and profitability.
What are the key components to calculate CLV?
The main components are: average order value, average purchase frequency rate, and average customer lifespan.
How do you calculate CLV for a Shopify store?
The formula is: CLV = Average Order Value x Average Purchase Frequency Rate x Average Customer Lifespan.
What is the average customer lifespan and why is it important for CLV?
The average customer lifespan is the average duration of the customer relationship, typically calculated in years or months. It’s a crucial factor in the CLV calculation.
How can retailers use CLV to improve their business?
CLV can help retailers optimize marketing spending, target high-value customers, and make more informed decisions to drive long-term profitability.